The principal legal effects of Brexit on commercial contracts in Morocco

Financial analysts remain uncertain about the potential effects on
the global economy of the United Kingdom’s anticipated exit from
the European Union (Brexit).

Although the effects are unclear, the announcement on Friday
24 June 2016 plunged some financial markets to levels not seen
since 9/11.

Brexit raises many legitimate questions and concerns for the UK’s
main economic partners which include the Kingdom of Morocco.

Morocco is the UK’s 7th-ranked customer and its 15th-ranked
supplier. For the time being, Morocco’s politicians and economists
appear to be reacting pragmatically. They see in Brexit an
opportunity to develop closer, more bespoke direct trading links
with Great Britain without the involvement of the European
Union. The impact of Brexit on the Moroccan economy would be
negligible according to a press release from the Governor of Bank
Al Maghrib on 24 June 2016.

In terms of regulations, the separation from the European Union
should not be overly difficult, either as regards its effective
implementation (the exit negotiations phase will last two years,
which will be difficult to stick to in practice for the negotiation
of such a far-reaching exit agreement) or its scope, given how
intertwined UK laws are with those of the European Union.

Several European directives will continue to be applied or
will be retranscribed by the UK. Furthermore, the UK will
be able to draw inspiration from existing arrangements such
as the Norwegian model (part of the European Economic
Area, allowing it to benefit from the freedom of movement of
persons), the Swiss model (bilateral free-trade agreements) and
the Turkish model (a new customs union).

If a deal of this sort cannot be reached and without an
important part of its current legal system, it would be
the World Trade Organization’s rules that apply, with the
introduction (or reintroduction) of trade and tariff barriers.
In these scenarios, the UK would have to renegotiate trade
agreements on a case-by-case basis (with each of the separate
countries) using global WTO agreements.

What about the legal impact of Brexit? DLA Piper Casablanca
has set out below an outline of the main legal effects of Brexit on
commercial contracts in Morocco.

From the outset, we should like to emphasise that Brexit will only
come into effect after a period of negotiations lasting two years,
as set out in Article 50 of the Lisbon Treaty. The negotiation
period may be extended by the European Council. Certain clauses
often found in many commercial contracts and transnational
investment partnership agreements (particularly those governed
by English law and/or involving UK parties or assets) will have to
be looked at again in detail and drafted with care in light of Brexit.
From now on, practitioners will undoubtedly define Brexit with
precision in contracts to avoid any margin for interpretation, given
how significant its effects could be on contracts (exit by a partner,
early termination of a contract, renegotiation, suspension, etc.).

These clauses allow one or all parties to exit a contract during
the interim period between the date the contract is signed
and the date the proposed transaction is fulfilled (subject to
satisfaction of a certain number of conditions precedent such as
obtaining regulatory authorisations or financing). This exit right
is exercisable if a major, adverse political, financial or legal event
occurs or is likely to occur, that would compromise fulfilment of
the transaction. The recent financial crises have seen a revival
of such clauses in M&A transactions and financing deals. They
involve bitter negotiations. The effect of the unexpected Brexit on
current contracts and its consequences for future contracts (such
as changes in interest rates and significant currency fluctuations)
could have all the characteristics of an adverse political and
financial event for a party to a contract. We believe that MAC
clauses should expressly set out those consequences of Brexit
that constitute an MAC event for the parties.

2. Hardship clauses

These are different from MAC clauses which only cover the period
up to the granting of the financing and/or the transfer of the
underlying asset. They apply throughout the period during which the
contract is performed. Hardship clauses are found in commercial
agreements or partnerships which are performed over a long period
of time. They allow the signatories to require that new negotiations
be entered into if an economic or technological event occurs that
upsets the contract’s original economic rationale. However, it should
be noted that these clauses have a more limited effect than MAC
clauses as they only implement an obligation to renegotiate which,
if breached, results in damages, with no exit right for the party that
suffers the economic imbalance. We feel that the unpredictable
currency fluctuations caused by the fall in sterling mean that Brexit
may be covered by such clauses. The same applies with the impact
of Brexit on those free-trade agreements that form the basis of the
economic rationale for numerous contracts. Of course, agreements that will terminate will inevitably be replaced by direct agreements, as the flow of trade cannot be interrupted. Uncertainty still remains, however, regarding such agreements coming into effect. Could we face a period during which no equivalent agreement is introduced to deal with trade and any significant differences between the new trade agreements and their European predecessors? Using Hardship clauses would be one way of adapting contracts to new regulatory constraints that were, until now, unforeseeable and unavoidable.

3. Force Majeure clauses

Our comments above on MAC and Hardship clauses are also valid for all clauses used to manage the effects on the performance of parties’ obligations, of events that are unforeseeable and beyond their control (such as suspension, delay and exemption from liability). Could the unexpected occurrence of Brexit constitute a Force Majeure event for current contracts? Whether or not it was unforeseeable would be seriously debatable given that the outcome of a referendum is only one of two possibilities. For future contracts, parties that take the view that certain consequences of Brexit could constitute economic and political Force Majeure events for them will have to specify this clearly in the contract in order to avoid any dispute regarding the legal impact when they occur.
The wording of Force Majeure clauses (including MAC and Hardship clauses which are akin to Force Majeure clauses) will have to specify which party will bear the financial costs relating to their implementation and, if applicable, the financial costs relating to the renegotiation of the contract or the suspension or rescission that they entail.

4. Change of law clauses

These clauses are commonly found in documentation for financing, large scale projects, public-private partnerships and, generally, transnational deals. They allow parties to be released from certain obligations under liabilities warranties or payment obligations or even to renegotiate certain clauses of the contract if a change occurs in the legislative framework during the term of the contract which changes the initial scope of their obligations. To mitigate the effects of Brexit, it may be advisable to insert these clauses in order to specify the obligations that will continue to apply between the parties even if a change of law occurs during performance of the contract as a result of Brexit.

5. Exchange rate risk clauses

These clauses must also be scrutinised closely. Fluctuations in sterling are predicted and putting an exchange rate risk hedging instrument in place will have to be systematically considered before proceeding further with a deal, payment for which would be directly or indirectly influenced by the price of sterling.

6. Governing law clauses

As regards the choice of English law as the governing law for contracts, there is every reason to question whether (i) it might be challenged in the courts on the grounds that the contracting parties had chosen English law for its complete integration with European law, (ii) using it is appropriate at the start of projects, in the face of the potential legal uncertainty that it could cause during this interim period of uncertainty until Brexit comes into force. That said, will economic players actually have any choice, given that English law is almost always used in international projects and financing and is required by the large financial institutions (including some, based in London, who nevertheless risk losing their precious “European passport” if Brexit occurs)?

7. Arbitration clauses

As regards the applicability in Morocco of arbitration awards made in the UK and vice versa, Brexit will have no major impact as the two kingdoms are parties to the New York Convention of 7 June 1959 which provides that awards are enforceable between signatory countries. However, for the reasons given above, it is not out of the question that parties will seek to challenge English law as the governing law before a court of arbitration in London. The legal uncertainty factor relates to clauses that give jurisdiction to the British courts at first instance. Up until Brexit, the judgments of those courts could be appealed before the European Court of Justice under certain circumstances. Post-Brexit, this will no longer be possible. Clauses that submit disputes to arbitration using the International Chamber of Commerce should see a new lease of life.

Lastly, all clauses that refer to the European Union as a reference territory in franchise, distribution and non-compete or exclusivity agreements will have to be reviewed to take account of Brexit, in order to include the United Kingdom.

Associate

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.